Wakaya Perfection, LLC v. Youngevity Int'l, Inc., 17-4178

• Decision Date: 11 December 2018
• Docket Number: No. 17-4178,17-4178
• Citation: 910 F.3d 1118
• Parties: WAKAYA PERFECTION, LLC, a Utah Limited Liability Company; Todd Smith, an Individual; Blake Graham, an Individual; Dave Pitcock, an Individual; Barb Pitcock, an Individual; Andre Vaugh, an Individual; Total Nutrition, Inc, d/b/a TNT a Utah Corporation, Plaintiffs - Appellants, v. YOUNGEVITY INTERNATIONAL, INC., a California Corporation; Steve Wallach, an Individual; Michele Wallach, an Individual; Dave Briskie, an individual, Defendants - Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

910 F.3d 1118

WAKAYA PERFECTION, LLC, a Utah Limited Liability Company; Todd Smith, an Individual; Blake Graham, an Individual; Dave Pitcock, an Individual; Barb Pitcock, an Individual; Andre Vaugh, an Individual; Total Nutrition, Inc, d/b/a TNT a Utah Corporation, Plaintiffs - Appellants,

v.YOUNGEVITY INTERNATIONAL, INC., a California Corporation; Steve Wallach, an Individual; Michele Wallach, an Individual; Dave Briskie, an individual, Defendants - Appellees.

No. 17-4178

United States Court of Appeals, Tenth Circuit.

FILED December 11, 2018

Jonathan O. Hafen (Jonathan R. Schofield, Michael S. Anderson, and Cynthia D. Love, with him on the briefs), of Parr Brown Gee & Loveless, Salt Lake City, Utah, for Plaintiffs-Appellants.

Jonathan W. Emord (Peter A. Arhangelsky with him on the briefs), of Emord & Associates, Gilbert, Arizona, for Defendants-Appellees.

Before BACHARACH, EBEL, and MORITZ, Circuit Judges.

BACHARACH, Circuit Judge.

This appeal involves the interplay between two related lawsuits. In the first one, Wakaya Perfection, LLC and its principals sued Youngevity International Corp. and its principals in Utah state court. The Youngevity parties responded by bringing their own suit against the Wakaya parties in a California federal district court and removing the Utah case to federal court. These steps resulted in concurrent federal cases sharing at least some claims and issues. For example, in both cases, the parties disagreed over whether Wakaya could bring its claims in court rather than in arbitration.

The California litigation progressed; and in November 2017, the federal district court in Utah ordered dismissal, holding that

• the court should abstain from exercising jurisdiction under the Colorado River test and

• an arbitrator would need to decide the arbitrability of Wakaya’s claims.¹

We reverse on both grounds: The court applied the wrong abstention test and erroneously ruled that an arbitrator should decide whether Wakaya’s claims are arbitrable.

Issues in the Appeal

I. The district court erroneously applied the Colorado River test in dismissing the Utah lawsuit.

The district court erred in using an inapplicable test when deciding whether to dismiss the Utah lawsuit.

A. Reversal is necessary when the district court applies the wrong test.

We apply the abuse-of-discretion standard when reviewing a district court’s decision to abstain from exercising jurisdiction over one of two duplicative federal cases. Hartsel Springs Ranch of Colo., Inc. v. Bluegreen Corp. , 296 F.3d 982, 985 (10th Cir. 2002). A district court abuses its discretion when it bases a decision on an erroneous legal conclusion. Kansas v. United States , 249 F.3d 1213, 1227 (10th Cir. 2001) ; see also Sprint Nextel Corp. v. Middle Man, Inc. , 822 F.3d 524, 535 (10th Cir. 2016) (stating that a district court’s application of the wrong legal standard constitutes an abuse of discretion). We must therefore reverse when the district court applies the wrong test. See Sierra Club v. Cargill , 11 F.3d 1545, 1548 (10th Cir. 1993) (reversing because the "[t]he district court abused its discretion" in applying "the wrong standard of review and, as a result, the wrong analytical framework").

B. The district court applied the wrong test by treating the Colorado River test as controlling on abstention when both cases are in federal court.

The district court applied the abstention test set out in Colorado River Water Conservation District v. United States , 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). In this opinion, the Supreme Court recognized a narrow doctrine permitting a federal court to abstain from exercising jurisdiction when a parallel case exists in state court. Colo. River , 424 U.S. at 813, 96 S.Ct. 1236. Given the narrowness of this doctrine, the Colorado River test requires "exceptional circumstances" and an "important countervailing interest" for a federal court to abstain from exercising jurisdiction based on pending litigation in state court. Id. (quoting Cty. of Allegheny v. Frank Mashuda Co. , 360 U.S. 185, 189, 79 S.Ct. 1060, 3 L.Ed.2d 1163 (1959) ); see also Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 16, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (noting that "the balance [is] heavily weighted in favor of the exercise of [federal] jurisdiction" in a case involving state-federal concurrent litigation).

In this appeal, we must decide whether the Colorado River test controls when both of the cases are in federal court. We have recognized that the test applies when one of the cases is in state court. Rienhardt v. Kelly , 164 F.3d 1296, 1302 (10th Cir. 1999). In this circumstance, we have applied the Colorado River test and recognized eight pertinent factors:

1. the possibility that one of the two courts has exercised jurisdiction over property

2. the inconvenience from litigating in the federal forum

3. the avoidance of piecemeal litigation

4. the sequence in which the courts obtained jurisdiction

5. the "vexatious or reactive nature" of either case

6. the applicability of federal law

7. the potential for the state-court action to provide an effective remedy for the federal plaintiff

8. the possibility of forum shopping.

Fox v. Maulding , 16 F.3d 1079, 1082 (10th Cir. 1994).

Here, however, both of the parallel cases were pending in federal court. In this situation, courts elsewhere have held that the Colorado River test does not apply. See Missouri ex rel. Nixon v. Prudential Health Care Plan, Inc. , 259 F.3d 949, 953 (8th Cir. 2001) ("By its own terms, Colorado River applies only to concurrent state and federal litigation."); Levy v. Lewis , 635 F.2d 960, 967 (2d Cir. 1980) ("[I]t is clear ... that abstention for purposes of judicial economy from exercising its jurisdiction under Colorado River applies only where concurrent federal-state jurisdiction exists."); cf. Life-Link Int’l, Inc. v. Lalla , 902 F.2d 1493, 1494 (10th Cir. 1990) (per curiam) ("[ Paris v. Affleck , 431 F.Supp. 878 (M.D. Fla. 1977) ] was a removal case regarding whether claims could be concurrently litigated in two federal courts and, thus, is inapplicable to this case of concurrent litigation as between a state and a federal court.").²

These holdings comport with Colorado River itself in that the Supreme Court recognized the need for different approaches depending on whether the concurrent litigation involves

• parallel cases in federal courts or

• parallel cases in federal and state courts.

Colo. River , 424 U.S. at 817, 96 S.Ct. 1236 ; see also Missouri ex rel. Nixon , 259 F.3d at 953 (observing that the Supreme Court had contrasted its holding in Colorado River , which focused on concurrent federal-state litigation, with cases involving concurrent federal litigation). The need for a difference in approaches stems from the different purposes underlying each type of abstention: When a federal district court defers in favor of another federal case, the only concern is venue because federal jurisdiction will be exercised in one of the two districts. As a result, "no precise rule" has emerged to govern abstention when two federal district courts are addressing similar suits between the same parties. Colo. River , 424 U.S. at 817, 96 S.Ct. 1236 ; see Katz v. Gerardi , 655 F.3d 1212, 1217 (10th Cir. 2011).

The Youngevity parties apparently recognized this distinction when seeking sanctions; there they acknowledged that the Colorado River factors are immaterial when both cases are pending in federal court:

Furthermore, Youngevity did not address the Colorado River factors because those factors are irrelevant when two duplicative suits are pending in federal court. Those factors are relevant only when determining whether to dismiss a federal suit in favor of a concurrent state suit. Indeed, the Wakaya Parties concede that those factors would apply only where a federal court decides whether to dismiss a federal action in favor of a concurrent and duplicative state suit. In their Opening Appeal Brief, however, the Wakaya Parties argued that the district court misapplied those exact same factors in dismissing a concurrent federal suit. The Wakaya Parties now concede that those factors are inapplicable to concurrent duplicative federal proceedings.

Appellees’ Reply to Appellants’ Opp. to Mot. for Sanctions at 12 (citations omitted). But in their response brief, the Youngevity parties take a different approach, arguing that the Colorado River test applies even when both of the parallel cases are in federal court.

For this argument, the Youngevity parties rely on a single sentence in United States v. Rice , 605 F.3d 473 (8th Cir. 2010), insisting that it recognizes the applicability of Colorado River when both cases are in federal court. In Rice , the defendant argued unsuccessfully that the district court should have abstained under Colorado River . In rejecting this argument, the Eighth Circuit Court of Appeals stated: " Colorado River abstention arises in limited ‘situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts.’ " Id. at 476 (quoting Colo. River Water Conservation Dist. v. United States , 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) ).

The Eighth Circuit was quoting part of a passage from Colorado River , where the Supreme Court had contrasted

• the principles supporting abstention in cases involving concurrent litigation and

• the principles supporting abstention in other situations.

The passage in Colorado River had stated:

Although this case falls within none of the abstention categories [that we have previously recognized], there are principles unrelated to considerations of proper constitutional adjudication and regard for federal-state relations which govern in situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts. These principles rest on considerations of "[w]ise judicial

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